Daily Journal Corporation — FY2023 Form 10-K
Reporting period: Fiscal year ended September 30, 2023; comparisons are with fiscal 2022. The company operates two businesses: Traditional Business (newspapers and related services) and Journal Technologies (justice-sector case-management software and services).
Financial performance
| Metric | FY2023 | FY2022 |
|---|---|---|
| Operating revenue | $67.709 million | $54.009 million |
| Operating expenses | $61.057 million | $52.020 million |
| Operating income | $6.652 million | $1.989 million |
| Operating margin | 9.8% | 3.7% |
| Pretax income (loss) | $28.102 million | ($102.549 million) |
| Net income (loss) | $21.452 million; $15.58 per share | ($75.624 million); ($54.81) per share |
| Net cash from (used in) operating activities | $15.084 million | ($5.261 million) |
Revenue increased 25%, led by Journal Technologies. Its revenue rose 35% to $51.456 million, including consulting fees up 67% to $19.776 million and licensing and maintenance fees up 22% to $23.503 million. Traditional Business revenue increased 2% to $16.253 million; advertising improved while circulation was nearly flat. Journal Technologies represented about 76% of revenue, versus 71% in FY2022.
Operating expenses rose 17%, including salaries and benefits up 19% to $43.450 million and outside services up 52% to $6.768 million. Operating income improved in both segments: Traditional Business reported $2.384 million, versus $0.702 million, and Journal Technologies reported $4.268 million, versus $1.287 million.
Reported net income was significantly affected by portfolio valuation. FY2023 included $17.024 million of unrealized gains on marketable securities; FY2022 included $123.401 million of unrealized losses. FY2023 also included $8.336 million of dividends and interest income, $0.422 million of realized securities gains, and $4.255 million of margin-loan interest expense. The effective tax rate was 23.7%.
Liquidity, debt and assets
At September 30, 2023, cash and cash equivalents were $21.038 million, restricted cash was $2.100 million, and marketable securities were $303.128 million. Working capital was $303.207 million. The portfolio had $137.716 million of pretax unrealized gains and was concentrated in eight companies; most unrealized gains related to three U.S. financial institutions and one foreign manufacturer.
Investment margin borrowings were $75 million, secured by the securities portfolio, with a 6% interest rate at year-end and interest payable monthly. The balance was unchanged from FY2022. The company also had a $1.278 million real-estate loan. Management said existing working capital and operating cash flows should fund operations for the foreseeable future, but securities values affect borrowing capacity and a significant decline could trigger margin calls. Operating cash flow turned positive; cash, cash equivalents and restricted cash increased $7.670 million during the year.
Outlook, risks and notable developments
- No specific numerical revenue or earnings guidance is provided. Management’s stated goal is to develop a profitable software business while benefiting from the Traditional Business for as long as possible.
- Management expects continued secular decline in the newspaper business, including pressure on subscriptions and advertising. California laws effective January 1, 2024 allow certain self-storage lien notices to be published once online instead of twice in newspapers; the filing estimates a potential annual earnings reduction of approximately $150,000–$200,000. School budget hearing notices are scheduled to move to school websites in 2027.
- Journal Technologies depends on government procurement, project completion and customer acceptance to recognize much installation revenue. The company reported two project cancellations in the past year and noted potential delays, cost overruns, and deferred or forgone government spending. Investment in product upgrades and next-generation technology is ongoing and expensed as incurred.
- Management identifies AI as a potential opportunity and disruption risk for both businesses. Other risks include cybersecurity, postage and paper costs, customer credit, and securities-market volatility.
- Charles T. Munger, who had long managed the securities portfolio, died on November 28, 2023. Management said it does not expect future portfolio performance to rival its past performance.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at September 30, 2023 because of material weaknesses involving segregation of duties and insufficient controls and resources for an effective internal-control assessment. The auditor issued an unqualified opinion on the financial statements but was not engaged to audit internal control. Software revenue recognition was identified as a critical audit matter.
- The company intends to consolidate its Los Angeles offices and seek to sell or lease an adjacent building in 2024. Routine litigation was not expected by management to have a material adverse effect.
Important facts for investors to verify
- How much operating cash flow and segment profitability are sustained as Journal Technologies’ implementation projects reach go-live.
- The value, concentration and borrowing terms of the securities portfolio, including exposure to margin calls and rising interest costs.
- The financial effects of public-notice law changes and continuing declines in newspaper subscriptions and advertising.
- Progress in remediating the disclosed material weaknesses in internal controls.
- Whether software modernization and AI-related initiatives improve competitiveness and margins without materially increasing costs or project risk.